By Belinda Allen, senior economist at CBA:
Key Points:
- The Minutes today affirm our view that the hurdle to hike the cash rate again is high.
- The RBA sound more comfortable that inflation is heading in the right direction, but remain on alert for sticky services prices.
- Our base case remains the peak in the cash rate is the current 4.10%.
- We expect rate cuts to occur in Q1 24 with the cash rate moving down to 3.10% by end-2024. But the risk is a later start date to the easing cycle if the labour market remains more resilient than we expect.
RBA Board Minutes show a more comfortable central bank
The RBA Minutes today follow a large amount of communication from the central bank over the past two weeks.
Governor Lowe and other RBA officials appeared before the House of Representatives Standing Committee on Economics last Friday, and the quarterly Statement on Monetary Policy was released a week earlier.
In all three communications the same tone has been struck of a central bank that appears more comfortable they are on the path to achieving the desired ‘even keel’ – i.e. inflation returning to target and some of the gains in the labour market secured.
The data flow before the August Board meeting appears crucial in allowing this more comfortable tone. The Minutes noted “the information received on inflation over the prior month had been reassuring”.
Q2 23 CPI printed below expectations with headline CPI at 0.8%/qtr and 6.0%/yr. Further detail in the Minutes was provided “Inflation had fallen further and been a little lower than expected in the June quarter”.
The weak retail trade print for June and confirmation of retail volumes contracting would also have contributed to the on hold decision.
The RBA has also expressed its view the labour market is at a turning point, albeit labour market conditions remain tight.
From here we expect the RBA to remain on hold for an extended period at 4.10%.
The Minutes note the arguments to lift the cash rate again will really come down to three things: sticky services prices, a lack of recovery in productivity growth and stronger wages growth.
Today’s Q2 23 WPI print make this latter argument more challenging to eventuate. Other arguments to lift the cash rate focus on a path of least regret “Raising the cash rate at this meeting would help to mitigate the risk of that undesirable scenario eventuating”.
The Minutes also note that “the staff’s forecasts were already conditioned on a further increase in the cash rate and that the cash rate was notably lower than policy rates in other countries, despite inflation in Australia being at least as high”. The forecasts used a cash rate peak of 4¼% versus the current 4.10% cash rate.
Rising home prices were again discussed: “members observed that the resumption of growth in housing prices could be a signal that financial conditions were not as tight as they had assessed”.
However the stronger argument in August was to leave the cash rate on hold.
As we noted above, the RBA appear more comfortable that interest rate hikes are working. The evidence through inflation, spending and the labour market is building. And again the Minutes highlighted that there are lags in the operation of monetary policy.
A tightening bias was again retained. Although this was watered down from the August post meeting statement: “some further tightening of monetary policy may be required to ensure that inflation returns to target in a reasonable timeframe”.
In the Minutes the forward guidance was altered to “members agreed that it was possible that some further tightening of monetary policy might be required to ensure that inflation returns to target in a reasonable timeframe”. Our bolding.
The data flow between now and the September meeting includes labour force (18/08); retail trade (28/08) and the monthly CPI (30/08).
However, we expect that the data flow will not provide the upside surprise required to force another rate hike in the near term.
From here the window is narrowing to what data flow could force another rate hike, given we expect the activity side to weaken from here.
Q3 23 WPI data and Q3 23 CPI, released 15/11 and 25/10 respectively are the next data prints we would expect the RBA will watch closely. At this stage we do not see these printing above expectations and forcing the RBA to lift the cash rate again.
We continue to expect the RBA is on hold at 4.10% till Q1 24 when we expect a monetary policy easing cycle to commence.
The key risks are to a later start date if the labour market proves more resilient than we expect or inflation takes longer to ease.
